You could lose your car if you miss a single payment
If you need to raise a few thousand dollars and you can’t get a regular bank loan, you might be tempted to apply for a car title loan. You put up your vehicle as security, and then just pay back the money over the next few months. There’s no credit check, and you don’t even have to give your bank details. Sounds great, doesn’t it? Er, no… It might be easy to get an auto title loan, but you need to know it’s a very risky way to borrow.
Interest rates can be high
In some states, interest on consumer financing products such as auto title loans is capped at 30-36 percent a year. Here, though, lenders often compensate by charging steep fees if you make a late payment, and for issuing loan documents and verifying that you don’t have outstanding loans or liens on the car.
Elsewhere, APRs (annualized percentage rates) on title loans are often 300 percent or more. For example, in Illinois, rates are unregulated and can be as high as 700 percent a year. As with payday loans, these interest rates can be perfectly manageable if you’re able to repay your loan within a month or two. However, because car title loans are often worth several thousand dollars, many borrowers find themselves extending their loans many times, and getting deeper and deeper into debt as interest charges pile up.
Watch out for scams
Car title loans are illegal in several states, but there you might be offered a “motor vehicle line of credit” or “sale and leaseback” deal instead. While these are basically the same thing as a car title loan, because they’re not permitted you have no legal recourse if the lender decides to seize your vehicle even if you’ve made all your payments on time.
Even though it’s against the law for any title loan issuer in the United States to charge you a fee when they repossess your car, some will still demand payment. In some cases, borrowers have had to pay cleaning charges, as well as hourly rates for someone to come and pick up their cars, plus mileage and towing fees.
“Pay on time or we’ll take your wheels”
When you pawn your jewelry to raise some cash, you know you have to go back and make regular payments or the pawn shop will confiscate your valuables and sell them. Well, a car title lender can do the same thing with your car. In other words, if you miss just one payment of maybe a couple of hundred dollars, you could lose a vehicle that’s worth many thousands, and you’ll have no way of getting around. That’s a pretty big risk to take.
Some lenders will sue you instead, which means you don’t have to give up the car – as long as you can pay the entire amount you owe them, plus court costs and other legal fees – and of course that can be a challenge when you’re strapped for cash. Before signing any title loan papers, you must check the fine print for details on the penalties for late payment or non-payment. Can the loan company seize the car if your payment is just a day late? Will they hike your interest rate instead? Can they track you down via GPS and disable your engine remotely if they don’t get their money?
Try to find the money somewhere else
The risk of losing your car to a title lender is so high that, for most people, it’s worth making the effort to borrow from a different source. Think about applying for a payday loan, which doesn’t require you to put up your car as security. You might be eligible for an affordable credit union loan or for government assistance. How about having a garage sale or selling some things on eBay?
It’s hard to live without your car, so don’t risk losing yours just because you can’t manage the repayments on a title loan.